Treasury Management Services

Retirement Services

Understanding the Full Picture: Why Form 5500 Doesn't Tell the Full Story

A series of letters sent by a Yale Law School professor has been stealing headlines for the past few weeks. According to these letters, the professor is studying the financial impact of plan fees. As a result, he has identified any company receiving the letter as a potential high-cost plan. The study is based on Form 5500 data compiled by BrightScope and the rankings they assign to 401(k) plans.

According to the letter, the study will be published in spring 2014 through news and social media channels, and it will identify these plan sponsors. The letter further employs scare tactics, reminding sponsors that it is their fiduciary responsibility to act solely in the interests of the plan participants.

It is true that plan sponsors have a fiduciary duty to ensure their fees are reasonable on behalf of their participants; however, the data cited within this study contains inherent flaws that would prevent it from accurately making such a determination.

The study is based on Form 5500 data from 2009. This information is outdated and insufficient to make meaningful comparisons across industry, plan size, investment options and participant size.

The data also does not account for the plan design’s relative complexity.

It ignores fees directly paid by the plan sponsors, which prevents a complete assessment of the reasonableness of aggregate fees.

The data does not address levels of service or relative performance, including whether a professional plan advisor assists the plan sponsor and participants.

Further, a recent study by the Government Accountability Office acknowledged the limitations of the Form 5500 data to comprehensively assess plan fees.

While fee structures often consume the attention of sponsors and participants alike, your fiduciary duties center on the reasonableness of your plan’s fees. This does not require a plan sponsor to select the cheapest options, which very well may not be in the best interests of their participants.

Your First Western Trust retirement team is committed to helping you meet every requirement of your fiduciary duties, which is why we help shoulder the responsibility as a 3(38) fiduciary advisor. Through benchmarking reviews, we look at much more than simply Form 5500 data so that we can accurately assess and compare your plan against others of a similar industry, size and participant level. We review plan complexity, investment options, levels of service, performance and all fees paid to truly determine the reasonableness of your fees.

When looking at a retirement plan, it’s critical to review the entire picture. Focusing only on fees without understanding the services contained within a plan does not reveal whether you are fulfilling your duties as a sponsor. Although attention-grabbing and likely an unpleasant surprise to receive, the letter and the study are incomplete and do not tell the full story of any company’s retirement plan.

Should you have any questions about this study or your fiduciary responsibilities, please do not hesitate to reach out to our retirement team at 303.531.8100. We’d be happy to discuss these topics with you.